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4/05/01 Investment House Daily
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Investment House Daily Subscribers:
TONIGHT:
- We hit a clearing in the woods but not at the edge of the forest yet.
- Impressive numbers all around except for volume.
- Everyone is anticipating the March employment report, but the weekly jobless claims are telling the current story, and it is not great.
- Mixed earnings news after hours has stocks heading different directions.
- Subscriber Questions.
- Team Trades.
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THE SUMMARY
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The indexes exploded higher today after showing the signs last night.
We were looking for one of the index' little bounces, but today they decided to blow it out on the price side, logging huge price and percentage gains. In one day the indexes and many beaten stocks rallied up to their 10 day MVA's and other levels of near term resistance. What normally was taking the indexes 2 to 3 days to accomplish they did in one session. The indexes refused to sell, and the strong price action had a lot of people talking about the end of the bear market. Just as many, however, were cautioning this was not the end. That is a major shift from the past attempts at rallying, and it means that this move may be more than a one day wonder. It definitely has the momentum, and the markets need a bear market rally that lasts more than three days to help set the stage for a true double bottom of lasting proportions.
Problems with today's rally being 'the' rally.
The price moves were impressive. One of the largest on the Dow, third greatest percentage move on the Nasdaq, etc. All sound nice and it was definitely fun to play stocks to the upside and not see them run back down on you at the end of the session. Indeed, we kept an order ready to go on some QQQ, OEX, DJX and SOX puts in case we saw a pattern set up and start to sell hard. We saw volume looked as if it was going to be light, so we were ready. It did not happen today. That does not mean it won't.
Volume to the upside is still not there.
The big, glaring issue today: volume. On the NYSE and the Nasdaq, volume came in significantly lower than the previous selling volumes. Even if you look at Wednesday as a reversal day on the Dow and S&P, Tuesday's massive selling volume far exceeded today's upside action. That is a sign that there are more sellers out there on selling days than buyers on upside days. Unless more volume is generated on the up moves, the rally is not convincing many of those who need to participate to make it last, i.e., the institutions. That does not mean it won't continue to move up; indeed, bear market rallies can either proceed on lighter volume or heavier volume. After getting sold out, buyers enter and push stocks higher as sellers take a breather and let it set back up. If there are not more buyers than sellers, as soon as the indexes hit some resistance point that makes it stumble, the sellers are all over it again.
Pretty brief pattern for the end of the bear market.
Further, there have been just 9 trading days on the Dow and S&P 500 since they tapped new lows, rallied, and then re-tested those lows. While that may bode well for the near term if they are able to break resistance at the middle of these small double bottom patterns, major market turns usually do not build on tests that are so close in time. Recall that we were looking for a rally of 3 to 4 weeks before a test of the low. That allows the eager buyers to rush back in, ride a bit of a gain, start to feel good, and then see it all crap out on them again. That scares them to death and they throw up their hands in despair and walk away . . . just when the market turns around on a double bottom and gives solid confirmation to the upside. This short span may work, but usually more time is needed. So, instead of today's move marking the bottom of the entire bear, perhaps it markets the beginning of the bear market rally that precedes the final test. Certainly the volume did not back the theory this was the end of the bear, and there are major resistance levels just ahead.
Sentiment is more favorable, but still not at historical (hysterical?) fear levels.
The fact that many would not come out and say this was the bear breaking rally today was a good sign. If the Nasdaq gained 50 points and Cisco was up 50 cents you could bet on calls the market had bottomed. Today they were biting their tongues.
Still, look at the bull/bear breakout: bulls at 49%, bears at 38.5%. Too many bulls and too few bears. Bears need to catch and overtake bulls by traditional standards. The AAII survey of retail investors showed an increase in bears to 38.74% from 27.45% last week, but that is still not enough. And you can bet with this little jog higher today that the bulls will be sowing their oats tonight on the chat rooms.
Volatility spiked back up to the interim reversal levels we have seen in the past that sparked rallies, but no matter how intensely they started, they burned out. Heck, the two previous rallies that sparked up on the Nasdaq when the VXN hit near 78 started on a massive volume spike. This one did not come close to surpassing Tuesday's selling volume (2.574 billion).
Hate to be pessimists, but if you are not practical you are losing money. This market could rally higher and higher on light volume or it could start moving on heavier volume. Either way is fine. We can play the strong upside stocks in good patterns on the upside moves. They may not give gains as big as the big names in perfectly hideous patterns, but they will also be less likely to violently convulse and reverse on us in thirty minutes when the Chinese dictator belches.
THE ECONOMY
Weekly jobs claims continue to rise after a brief pause.
Last week's encouraging report was tossed out today as new jobless claims rose to 383,000, up 18,000 from last week (which was revised higher by 5,000). That is the highest level in 2.5 years. The 4-week average rose to 377,500 after dropping for the first time in several weeks last week.
The jobs report tomorrow has everyone's focus because the Fed seems to make such a big deal of it. But it is behind the times as the weekly jobless claims indicate and the newest corporate layoff data today indicates. 162,867 jobs were eliminated in March 2001 versus 55,783 in March 2000. In the past four months that number is over 540,000. That is more than before the recession of 1991. The Fed needs to get back on the stick, and the senate needs to get off of its big government kick and get the money back into the economy where it is needed.
To write you senators and House reps, here are the web sites where you can get their email addresses. Put some pressure on them for the sake of the economy and prosperity. The vote is supposedly going to occur again tomorrow with the $450 million cut out put back in.
http://www.senate.gov/
http://www.house.gov/
THE MARKETS
Explosive price moves but volume did not follow. It was decent, but it did not outstrip the sellers as shown by the recent selling volume. The SOX rallied but bounced down from resistance at 535. Several groups that were up sharply in price did not follow through with volume. These include the semiconductors, software and certain financials.
Overall market stats:
VIX: 34.98; -4.09. Hits 40 and runs like a scalded dog back down. On such a powerful price gain, however, what can you expect? We anticipated a rally off of the intraday 40 reading from Tuesday, and that is what we are experiencing now. Staying power? Without the volume or a run up to near 50, fear was not too great on the last selling, so this indicates the move will have some difficulty unless it gets more converts.
VXN: 76.29; -0.08. Now this was an interesting reading. The Nasdaq was up 146 points yet volatility did not budge. Indeed, it started the session at 78.40 and worked its way down from there. This shows there is still a lot of skepticism in the move. That is good for the index longer term if it can maintain that higher level of skepticism, but that still may not avoid another selloff after a bear rally. Indeed, that may spike it to the levels needed for a real bottom to build on.
Put/Call ratio (CBOE): 0.70; -0.03. Interesting as well. The ratio dropped slightly on a massive rally, and it still held at fairly high levels. That is another sign of remaining anxiety and a concern that a one day rally is something we have seen several times before. We would love to see a spike well above 1.0 on the close on some sharp selling in a week or two. Option activity overall climbed to 1.576 million units on the CBOE, up from 1.315 Wednesday. With the p/c ratio holding steady, that tells us that more put options were being traded, most likely closing positions opened on the massive selling earlier in the week.
NASDAQ: Impressive price gain that would not sell back. A bullish day as it bounced up out of a potential intraday head and shoulders pattern and raced ahead using its short term intraday MVA's as support. Volume peeled back, however, as the index sits just below its 10 day MVA.
Stats: Up 146.20 points (+8.9%) to close at 1785.00.
Volume: 2.331 billion (-5.3%). The upside/downside ratio was truly astounding. Up volume was 2.209 billion shares versus 87 million to the downside. That is the most lop-sided volume we have seen in ages (25 to 1). Still, even though it was above average volume, it was less than the 2.5746 billion on Tuesday's selling. Good volume that could keep a short term rally moving higher, however.
A/D and Hi/Lo: Advancing issues just pulverized down issues 3.35 to 1. That was impressive, and that is the type of an A/D ratio that confirmations are made of. This was not a confirmation day, however, and to put it into perspective, Tuesday's decliners topped advancers 3.78 to 1. New highs trucked in at 69 (+24) as new lows dropped dramatically to 172 (-546).
The Chart: http://www.investmenthouse.com/cd/$compq.html
The chart is not a thing of beauty. It is hard to say there is a double bottom here or much of any other pattern for that matter. It gapped sharply higher and rose all day to finish right at the session high. It is now perched just beneath its 10 day MVA (1799.53) and a down trendline connecting the late January high with the peaks on the downtrend from there. The Nasdaq has emerged above the 10 day MVA on three occasions during this downtrend, but has fallen immediately back below that level. If it can manage two closes above that level, that will be significant. If not, look for some more selling.
Perhaps this was enough selling on the Nasdaq. It was down three legs of almost equal percentage drops since the bear market started. Tuesday it sliced below that level and perceived support and scared a lot of investors that perhaps there was a lot more downside to come. That could have done the trick, but we will have to see it start working with high volume gains and all of the other attributes of a confirmed rally.
Dow/NYSE: The Dow soared in a big point gain, but percentage-wise it was not even in the top 10. The move made quick work of the 10 and 18 day MVA's, and now it faces the most serious test of this little double bottom, the breakout that coincides with the 10,000 level.
Stats: Up 402.63 points (+4.2%) to close at 9918.05.
Volume: NYSE volume did not match the move, however, falling to 1.368 billion shares (-9.5%). Again volume fell on a move up and was lower than the recent selling volume. Still, it was not that much lower. This gives some credibility to this move being longer in duration if it can breakout of the double bottom.
A/D and Hi/Lo: Advancing issues jumped back ahead 3.08 to 1 (3.19 to 1 Tuesday). Again, no new high or new low information this evening.
The Chart: http://www.investmenthouse.com/cd/$dja.html
The Dow continues to move up toward the breakout of its recent double bottom pattern. The breakout point is 9992.53. We want to see stronger volume on that move to give it more power. Unlike the Nasdaq, this is a real pattern that can lead to something much more significant on a breakout. As noted earlier, however, the spread on the pattern, i.e., the number of days involved, may be a bit light to carry the market far. However, we should not ignore the numbers if they are bullish. If it breaks out on higher volume, that is a bullish sign. Note that on a weekly chart the selling volume three and four weeks ago was much higher than the rallying volume of the past two weeks. Volume is rising this past week, however. If stocks breakout from solid patterns with the index, that is a key factor.
We also have to watch for the failure to breakout above resistance. If the index reverses on similar volume to what we have been seeing on the buying, that is a cue to go ahead and look at DJX options again.
S&P 500: The big caps surged higher as well, but the lower NYSE volume did not instill tremendous confidence. It was strong volume, but not rising volume. The index cleared its 10 day MVA on the close, but that has not acted as resistance on this move. That has been reserved to the 18 day MVA (1158.31). The down trendline is now at 1160 and the breakout of the double bottom pattern is at 1182.17. It has a much tougher road to hoe than the Dow, and we will see if there is more volume to support a move or if it bleeds off as other moves have.
Stats: Up 48.19 points (+4.37%) to close at 1151.44.
Volume: NYSE volume was strong and above average, but it did not follow the price higher. 1.368 billion shares (-9.5%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Friday and the employment numbers are out before the open. Thursday's move carried a lot of momentum with it and we could very well see further upside in the morning on the heels of the strength. That will give us a look to see just how ready the Nasdaq and the S&P are to take out resistance. The Dow also is just 74.48 points away from breaking out of its double bottom pattern (9992.53). The momentum could carry the indexes over that resistance early on. We will be watching closely. As noted the semiconductors and the software sectors did not follow the moves up with strong volume either. Unless buyers come in, there could be a stall here.
Would a stall necessarily mean the end of any upward momentum? No. Big moves often lead to some selling the next session, especially in a bear market. Especially on Friday's in a bear market. Moreover, Friday's often give us lower volume as mutual fund managers hit the road early. With the Masters tournament in full swing, many will be watching that on cable all day. Thus we may not get a definitive day either way. If so, no problem because we will get the nod one way or the other fairly soon. The good thing about this market is that the emotion leads the way most of the time.
On the other hand we may get that definitive move with a solid breakout or a reversal off the highs after testing or breaking through resistance only to fall back on rising volume. That is a sign to take more short positions. We need to be careful not to be too quick to jump on the shorting bandwagon this time around. Everyone is on to the game this time; it has been on CNBC every day as a way to make money right now. Investors are waiting for the next rally to short. That can have a reverse effect as shorts jump in at the first sign of weakness and then if real buyers (institutions) are buying, the shorts get squeezed and have to cover and that drives prices higher and higher. The point: make sure you see the move on downside plays. That means let it turn down from resistance, TEST resistance, and then fall. Whether you are watching on eSignal or your broker knows your plan and when to call you, you can check to see if the tap of that resistance has been made. If it gives it that kiss good-bye and starts to fall, that is the entry point.
This has the potential to be either a major turning point or a bear market rally that lasts a few weeks more, or just another brief interlude in the vicious selling seen since February. We will play the trades as presented in this type of move, e.g., breakouts, pre-splits, bounces, pre-announcement plays. If they present themselves, take them. But we cannot lose sight of the fact that we are still in a bear market, the downtrends have not been broken, there has been no follow through, and we are not seeing breakouts from solid patterns from lots and lots of stocks. Thus if this move starts to fold, we are not going to try and squeeze another quarter point out of upside plays. We will take the safe road and bank profit and look for the next play. If the market is off and running, we will have many chances to play it. Take the obvious, easy plays. Don't get cute and try to push a bad position. Don't get caught up in the emotion.
Support and Resistance Levels
Nasdaq: Closed at 1785.00.
Resistance: Snapped 1750 with ease, and is looking at 1800 (the 10 day MVA). The 18 day MVA is at 1875.52.
Support: 1619.58 is the recent low. After that 1500 or 1300.
S&P 500: Closed at 1151.44.
Resistance: 18 day MVA is at 1158.31. The down trendline is at 1160.
Support: 1085.
Dow: Closed at 9918.05.
Resistance: Breakout is 9992. After that, the down trendline is at 2145.48 (coincides with the 50 day MVA).
Support: 9106 is the intraday low. Then it is 8750.
End Part 1 of 2
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